TARUN SHARDA JOINT COMMISSIONER OF INCOME TAX (IN SITU) CIRCLE-I, LUDHIANA, LUDHIANA vs. SHARMANJI YARNS PRIVATE LIMITED, LUDHIANA

2. The Hon’ble CIT(A) (NFAC) has erred in adopting the rate of 9% on the basis of average profit of 3 consecutive years, without appreciating the fact that appellant had already offered / declared 8.47% profit in its return of income & further addition of 9% practically amounts to taxing / working out the profit @17.47% (8.47+9) i.e., more than 200% which is practically not possible/ 3. The Hon’ble CIT has erred in arriving at the said decision, without appreciating the fact that no sales could have been made without corresponding purchases & that assessing officer had neither pointed out nay defect in appellant’s books of account, nor in the stock details furnished during the course of assessment proceedings and / or during appellate proceedings.

4. The Hon’ble CIT has erred in confirming the addition / disallowance @9% vis-à-vis the alleged bogus purchases of Rs.88,07,02,329/- without considering apparently (practically ignoring) that fact that the amount of purchases claimed by the appellant from the parties under consideration was Rs.82,91,18,342/- only.

5. The Hon’ble CIT has erred in sustaining the partial addition / disallowance without appreciating the fact & the law that the Ld. assessing officer had relied upon the statement of third parties, without having being given / offered an opportunity of cross examination, in spite of appellant having specifically requested for the same thereby making the very assessment order having been passed in violation of principle of natural justice and as such not tenable in the eyes of law.

6. The Hon’ble CIT(A)[NFAC) has erred in ignoring the fact that the assessment order having been passed in pursuance of show cause notice dated 12/09/2022, asking appellant to furnish its reply on / or before 17/09/2022 i.e., without granting time of 7 working days being in contravention of provisions of law was liable to be annulled and the same deserves to be and may please be quashed.

7. The Hon’ble CIT(A)[NFAC) has erred in restricting the disallowance / addition @9% vis-à-vis alleged amount of Rs.88,07,02,329/- without appreciating / considering that facts placed on record that vide show cause notice dated 12/09/2-22. The Ld. FAO had initially proposed disallowance of an amount of Rs.56,74,12,825/-, however without having given any further opportunity of being heard was disallowed an amount of Rs.88,07,02,329/- which itself makes the vary addition / disallowance not tenable in the eyes of law.

8. The appellant craves leave to add, amend, alter and / or vary any of the grounds at the time or before the hearing of the appeal.

3. That the Ld. CIT(A) has erred in ignoring the fact that the AO called for the information u/s 133(6) of the Income Tax Act, 1961 from seller parties, however, no reply has been received. Thus, the AO confirmed the bogus purchases made by the assessee amounting to Rs.87.02.329/-.

1.4 As is evident, the sole issue that arises for our consideration is addition of alleged bogus purchases. The Ld. CIT-DR advanced arguments supporting the addition made by Ld. AO in the assessment order by drawing our attention to the factual findings of Ld. AO. The Ld. AR also advanced arguments and sought deletion of impugned additions considering the facts of the case. Having heard rival submissions and upon perusal of case records, our adjudication would be as under.

Assessment Proceedings 2.1 The assessee being resident corporate assessee is stated to be engaged in manufacturing of cotton yarn / clothes etc. During assessment proceedings, allegation of bogus purchase of raw material by the assessee from various parties was made by Ld. AO. It transpired that the assessee made substantial purchases from entities who did not file their income tax returns. In this year, the disputed purchases are as under: - No. Name of the Supplier Amount (Rs. in Lacs) 1. M/s Neelkanth Enterprises Rs.1702.91 Lacs 2. M/s Ramesh Kumar Naresh Kumar Rs.979.23 Lacs (Prop. Shri Monu) 3. M/s Ram Oil Mill Rs.2650.10 Lacs 4. M/s Shri Ram Enterprises Rs.3474.76 Lacs Total Rs.8807.02 Lacs To verify the purchases, notices were issued by Ld. AO u/s 133(6) which remained to be responded by the suppliers. It was observed by Ld. AO that none of the suppliers had filed its Income Tax Return for this year. The field enquiries as well as enquiries from local residents revealed that no such entities existed at the given addresses. The Ld. AO also referred to the statement of Shri Monu in support of his allegation. 2.2 The assessee refuted the allegation of Ld. AO and submitted complete purchase bills issued by these suppliers along with transport bills, photographs of transport vehicles and ledger accounts of the suppliers. However, upon analysis of the same, many inconsistencies were pointed out by Ld. AO in these documents. Though the purchases were made in FY 2019-20 and field enquiries were made in FY 2022-23, none of the entity was found to be existing at the given address and residents of the respective areas testified that they have been residents of said areas for many years and there have not been any entities by these names at the given locations. Further, even if the businesses were now closed, there would be infrastructure in place to store the raw material, which was not found during physical verification. Some crucial details like PAN, GSTIN and phone numbers was found missing in the transport invoices. The same did not have any detail of freight charges. The assessee booked meagre freight charges. The GST registration of all the suppliers was cancelled at the request of the taxpayers. The perusal of bank statement of M/s Shri Ram Enterprises revealed that the account was in ‘Total Freeze’ due to KYC non-compliance. Statement was taken from Shri Monu to prove that sale transaction was never done by them and his PAN was used fraudulently. Further, Shri Monu was a daily wage worker. 2.3 In the light of all these facts, it was finally concluded by Ld. AO that the assessee has arranged bogus purchases from certain business entities whose very identity was disproved through physical verification and also by the statement of Shri Monu. This was done to inflate its expenses and to suppress profits. The assessee made use of bogus enterprises with supporting paper-trail in the form of purchase bills, transport bills etc. to claim non-genuine purchase expenses and recorded the same in its books of accounts. The information and documents submitted by the assessee to establish genuineness of the purchases were self-serving documents and part of the colorable device to present such bogus purchases as genuine on paper. Several inconsistencies were noted in the assessee’s submissions. By applying the theory of preponderance of probability as per the decision of Hon’ble Apex Court in the case of Durga Prasad More (82 ITR 540) and Sumati Dayal (214 ITR 801), the entire purchases of Rs.8807.02 Lacs was disallowed u/s 69C as unexplained expenditure and added to the income of the assessee. Appellate Proceedings 3.1 During first appeal, the assessee referred to various evidences to establish the genuineness of the impugned purchases. The same include purchase invoices, transport invoices, e-way bills for the purchases, photograph of the vehicles delivering the cotton, certified copy of account, bank statement evidencing payment of supplies through banking channels, GST returns of the suppliers as well as that of the assessee. The supplies were stated to be procured through agent against commission which was also recorded in the regular books. On the strength of these documents as well as by referring to various judicial decisions holding the field, the assessee assailed impugned addition as made by Ld. AO in the assessment order. 3.2 Another line of argument was that the assessee duly submitted the stock register, sales register etc. The perusal of the same would prove that the purchases so made by the assessee were subsequently sold to third-parties which were recorded as sales in the regular books of accounts. Any purchases made by the assessee either leads to a sale or the same ends up in the closing stock of the assessee. In the present case, sales or closing stock of the assessee were never in dispute. For any sales to take place, some purchases have to be made. It was further pointed out that after impugned addition, Gross Profit (GP) as shown would exponentially increase from 27.87% to 42.53% which was clearly unjustified considering the past trends of profitability. The GP rate of the assessee in preceding years was as under: - No. FY GP Rate NP Rate 1. 2019-20 27.87% 9.73% 2. 2018-19 26.98% 7.72% 3. 2017-18 27.34% 7.60% 4. 2016-17 26.81% 8.56% On the basis of profitability trends, the assessee opposed disallowance of purchases as made by Ld. AO. The assessee also opposed reliance on third-party statements without affording any opportunity of cross- examination to the assessee. As against this, the assessee filed affidavit of the suppliers confirming supply of material to the assessee. 3.3 The assessee’ submissions and evidences were subjected to remand proceedings and Ld. AO furnished a remand report on 11-03- 2024. The additional evidences were in the nature of affidavits of four parties from whom the purchases were made by the assessee. The assessee also furnished account-wise stock and sale register, summary of purchase bills, freight bills, e-way bills, and other details related to purchases made from four suppliers under consideration. The Ld. AO, while opposing the admission of additional evidences, opined that the affidavits of the suppliers were contradictory to in-depth enquiries as conducted during assessment proceedings. Shri Monu himself admitted misuse of his identity. Therefore, the genuineness of his affidavit could not be proved. In case of other three suppliers, local enquiries and statements of the local persons substantiated that their respective firms were doing no real business at the addresses mentioned on the invoices as submitted by the assessee. The affidavits were contradictory and the veracity of the same could not be ascertained in view of the fact that independent local enquires and statement on oath had already formed the basis of the non- genuineness of the sales made by these suppliers to the assessee. As per settled legal principles, taxing authorities were entitled to look into the surrounding circumstances to find out the reality of the recitals. The mere affidavits do not substantiate the claims made by the assessee with respect to the purchases made as they fail to rebut the independent enquiries of the Assessing Officer done during the assessment proceedings. 3.4 The assessee, in rejoinder, relied on the said affidavits and other documents to support the genuineness of the purchases. The assessee reiterated that opportunity of cross-examination of the suppliers was not afforded to the assessee. Further, two parties duly furnished response to notices issued by Ld. AO u/s 133(6) which was not considered. In respect of the statement of Shri Monu, it was stated that the proprietor had duly submitted his PAN, Aadhaar, GST registration, Balance Sheet, copies of assessee’s accounts in his books, bank statements, and GST returns vide response dated 20-09-2022 (Acknowledgement Number -1000009975). The same was also submitted by the assessee to NFAC vide submissions dated 24-09-2022 but the same was completely ignored. The assessee also opposed rejection of affidavits of three suppliers by NFAC.

3.5 In the final submissions, it was pleaded by the assessee that AO did not bring on record any adverse material to prove that the assessee had received back any cash from these suppliers. Further, AO did not doubt the corresponding sales made by the assessee in support of which the assessee had duly furnished sales register and stock register. No default / discrepancy was pointed out by Ld. AO in the same. The books results were accepted. The GP Rates and NP rate of this year was in line with books results of earlier years. If entire purchases were disallowed, the GP rate would be too abnormal at 42.53% as against actual GP rate of 27.87%. The cancellation of GST registration by the suppliers was beyond the control of the assessee. 3.6 The Ld. CIT(A), after due consideration of remand report as well as assessee’s submissions / documentary evidences, observed that the assessee was unable to produce the said suppliers. The assessee was not able to justify as to why the suppliers had denied having entered into genuine transactions with the assessee. None of the suppliers was found at the given addresses and all the suppliers had surrendered GST registration which raise serious doubt as to whether the purchases were genuinely made from the said parties or that the said parties had merely provided the bills and the purchases were made from the grey market. As against this, the purchases were duly supported by tax invoices, e-way bills, sales and stock registers. The payment to the suppliers was through banking channels. All the four suppliers confirmed the transaction post- assessment which was evident from the affidavits of the parties which was also furnished by the assessee to Ld. AO during remand proceedings. The Ld. AO did not bring on record any adverse material to prove that there was no movement of goods nor he had verified the contentions put forth by the assessee in the form of affidavits of the four suppliers. The provisions of Sec.69C would operate only when the assessee fails to offer any explanation in respect of the source of expenditure or if the explanation offered by assessee was not satisfactory. In the present case, the source of payment made for the impugned purchases was out of business proceeds. There was no evidence that the said consideration as paid by the assessee had come back to the assessee in cash so as to justify disallowance of entire purchases. No defect was pointed out in the books of accounts or in the sales reflected by the assessee. The impugned purchases were supported by tax invoices, e-way bills, GST returns. On these facts, Ld. CIT(A) referred to the decision of Chandigarh Tribunal in the case of Ganesh Dass Piara Lal Jain (82 Taxmann.com 354) deleting abnormal addition as made by Ld. AO. Finally, it was held by Ld. CIT(A) that the addition was to made for profit element embedded in such transactions as per the decision of various High Courts. The assessee’s average NP in the four years was 8.47%. To avoid leakage of revenue, Ld. CIT(A) upheld addition of 9% on purchases of Rs.88.07 Crores. The action of Ld. CIT(A) restricted the impugned addition to the extent of Rs.792.63 Lacs. Aggrieved as aforesaid, the assessee as well as the revenue is in further appeal before us. Our findings and Adjudication 4. From the factual matrix, it emerges that the assessee being resident corporate assessee is stated to be engaged in manufacturing of cotton yarn / clothes etc. Being a corporate assessee, the assessee is required to maintain complete quantitative details of its raw material, trading stock and finished goods. The assessee’s books of accounts have duly been audited as required under law. The assessee has maintained adequate stock details, sales register and purchases register. The raw material so purchased by the assessee either culminates into sales or end up in the closing stock / work-in-progress. No defect or discrepancy has been found in the books of accounts nor the books have been rejected by Ld. AO u/s 145(3). The assessee’s purchases during this year include purchases made from impugned four suppliers. To substantiate these purchases, the assessee furnished purchase bills and e-way bills evidencing transportation of goods from suppliers to the assessee. The e-way bills were generated from the website of GST department. The copies of substantial number of purchases bills, on sample basis, were duly been furnished by the assessee to Ld. AO during the course of assessment proceedings. The assessee had also furnished ledger extract of all the suppliers and the perusal of the same would show that the payment to the suppliers have been made through banking channels only and there are regular purchases from these four suppliers. The assessee has maintained a system of taking photograph of delivery vehicles along with vehicle registration number and driver of the vehicle with the loaded material i.e., raw cotton. The same were duly furnished by the assessee to Ld. AO during the course of assessment proceedings. The vehicle registration number matched with the e-way bill generated from the GST website. These purchases have duly been reported by the assessee in its GST returns and copies of applicable GSTR-1 & GSTR-3B returns were duly furnished by the assessee along with GST returns. During remand proceedings also, the assessee furnished affidavits of all these suppliers along with their respective GST registration certificates, Aadhar & PAN of proprietors thereof. By furnishing these documents, the assessee, in our considered opinion, had duly discharged the onus of substantiating these purchases and it was the onus of Ld. AO to contradict the same and bring on record cogent material evidences to prove its allegations of bogus purchases.

9. The Hon’ble Apex Court in the case of Odeon Builders Pvt. Ltd. (110 Taxmann.com 64) dismissed revenue’s SLP against the decision of lower appellate forums holding that where the assessee had submitted purchase bills, transportation bills, confirmed copy of accounts and VAT Registration of sellers as also their Income-tax Return and payment was made through cheques, purchases could not be disallowed. The lower courts deleted the similar disallowance of purchases by observing that disallowance merely on the basis of third-party information denying cross- examination to the assessee who had prima facie discharged the initial burden of substantiating the purchases through various documentation including purchase bills, transportation bills, confirmed copy of accounts and the fact of payment through cheques & VAT Registration of the sellers & their Income Tax Return, would not be sustainable. Similar is the decision of Hon’ble Rajasthan High Court in the case of Precious Jewels Corporation (17 Taxmann.com 264) confirming the orders of lower appellate authorities in deleting similar additions. The Chandigarh Tribunal in the case of Prime Steel Industries (P.) Ltd. vs. DCIT (174 taxmann.com 547), on similar facts, deleted the full disallowance as made by Ld. AO on account of alleged bogus purchases. The bench referred to various judicial decisions while arriving at its conclusion. This case law also supports the case of the assessee. The other decisions as placed on record are on similar lines and duly support the case of the assessee.

Order pronounced on 17/11/2025